Not the time to hike rates says Shadow Board as inflation slows

An interesting read from the NZ Institute of Economic Research Website..                  29 October 2014

NZIER’s Monetary Policy Shadow Board advises the Reserve Bank to leave the Official Cash Rate at 3.50 percent on Thursday – the appetite for interest rate hikes is waning.

“Annual inflation is running at one percent so future rate hikes risk driving inflation below the Reserve Bank’s target range” said Dr Kirdan Lees, Principal Economist at NZIER.

“Interest rates are at historic lows, supporting the economy, but firms are struggling to pass on price increases to consumers – not just in New Zealand but globally.”

Business confidence is moderating and the housing market is cooling. The exchange rate is easing reflecting lower world prices for New Zealand’s commodity exports. The global outlook is also more pessimistic than six months ago.

The Reserve Bank can now be more confident that inflation will remain low. With near-term risks to financial stability also easing, the Reserve Bank should hold interest rates where they are – at 3.50 percent. The Reserve Bank may even need to ease interest rates if the global or domestic economy deteriorates significantly although the Shadow Board does not view cuts as warranted right now.

Figure 1 shows the Shadow Board view for October. Figure 2 and Table 1 show individuals’ views and comments. The Shadow Board’s average recommended interest rate is 3.49 percent, extremely close to the current Official Cash Rate and down a little from six weeks ago (3.51 percent).

For the full report and graphs follow the link below….

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